High steel prices are now starting to bite

The sharp rise in the price of steel over the last year or so has come as a shock to many consumers. Users, notably construction companies and manufacturers, have been complaining about the cost of their most important raw material. Their balance-sheets have in some cases suffered a severe jolt.

The sharp rise in the price of steel over the last year or so has come as a shock to many consumers. Users, notably construction companies and manufacturers, have been complaining about the cost of their most important raw material. Their balance-sheets have in some cases suffered a severe jolt.

Buyers’ concerns are understandable. Never have they faced price increases on this scale. In fact, they have had their steel on the cheap for decades: by any measure, the trend in steel values has been way below the level of inflation for more than 20 years. It was the steel companies’ profits that suffered.

We detect growing signs of acceptance by end-users. Complaints about price hikes appear to be lessening. Steel producers report success in getting sizeable price adjustments from their largest customers. In Japan, for example, major automobile manufacturers are said to have agreed to pay an unprecedented second price increase this year for their steel sheets: normal practice is for one annual agreement.

Leading European strip product mill Arcelor says 90 percent of its purchasers in the automotive sector and two-thirds of its packaging customers have agreed to increases in contract prices for 2005. The gains are at least 20 percent and in some cases as much as 50 percent: but this still leaves them below spot market rates which for cold rolled coil have gone up by close to 70 percent since this time last year.

US manufacturers of domestic appliances, so-called “white goods”, are lifting prices in order to offset a growth in raw material costs. Appliance makers have announced price increases of between 5 and 10 percent from the start of 2005. They expect to be successful, which means the consumer will pay the higher price of steel. In the automotive sector, Delphi is among the major steel users who have issued profits warnings blamed on escalating input costs. At the same time it expressed concern about the financial stability of some of its smaller sub-contractors. Several US component manufacturers have declared bankruptcy.

Yet these very sharp increases in steel prices do not seem to have done serious harm to demand. Even excluding China, total steel consumption so far this year is up by 5.7 percent. Availability of steel, rather than the price, is still the first concern for many users. To take one specific example: output of structural steel fabrications in the UK is at a 15-year high this year, despite the rise in steel costs.

With the squeeze on raw materials set to continue for the foreseeable future, we do not expect the days when steel was cheaper than potatoes to return any time soon.